Wednesday, October 14, 2009

Business problems show up as inventory

Have you heard the business axiom "business problems show up as inventory"?

Whether you count inventory as WIP, raw materials or finished goods, the health of your organization is generally apparent in the level of inventory on hand. Many companies recognize this simple truth and adopt a goal to reduce inventories. The senior leadership typically sets a target for a 20% inventory reduction. Most companies typically carry 30-40% more inventory than they need to.

But without effective tools to identify excess inventory and properly manage it, most companies fail to achieve and, more importantly, sustain this inventory reduction goal. The impact of poor sales and operations planning, poor scheduling, engineering changes, material shortages, long lead times and cycle times, batching and large order quantities, overzealous buying and early material receipts are often blamed as causes for excess inventory. Without a structured approach, sustained inventory optimization is difficult to achieve.

Many companies have applied ABC categorization of inventory. This time tested approach states that by paying attention to a small percentage of line items in your inventory (20%), you can manage the lion's share (80%) of your inventory value. Most MRP systems are based on this premise.

The next step in achieving inventory reduction (as a focussed initiative unto itself) is to use the IQR methodology. Inventory Quality Ratio (IQR) is a ratio of your high moving items to the total inventory value. This is typically 30-40% in most companies. By further categorizing your inventory into active, excess, slow moving and non-moving inventory, you can improve this quality ratio enormously - typically identifying, achieving and sustaining a 30% reduction in inventory on hand.

While Lean Thinking as a strategy will yield impressive results in WIP and inventory reduction, the results can take from 6 to 18 months to see. Using IQR as a tool for rapid inventory reduction deployment, expect to see step change results in 3-6 months. Contact us for more details.


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